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If Comcast and Charter come together to split up Time Warner, regulators might just go for it. This would give the industry a brighter future and pave the way for future consolidation.

Christmas may come early for Liberty Media Chairman John Malone, or maybe at the normal time. The Godfather of the cable industry has spoken endlessly about the need for industry consolidation, with an eye on Time Warner Cable(UNKNOWN:TWC.DL). Now, with support from industry's gorilla Comcast(NASDAQ:CMCSA), a deal may be closer than ever. To appease ambitious regulators, Comcast may share the fruits of a merger between Time Warner and Liberty-backed Charter Communications(NASDAQ:CHTR) in what would be the first major move to fight back against the trend away from cable. While investors should treat deal talk as speculation until the day it happens, this one appears to be materializing.

GimmeWith no request for help from the other side, Malone really wants Charter Communications (a company Liberty Media owns a quarter of) to buy Time Warner Cable. It's not that Time Warner is suffering. In the last quarter, the company posted higher earnings on continued growth in broadband services and higher average revenue per user. But, like other cable companies in today's media landscape, Time Warner is bleeding video subscribers. With incidents like last fall's CBS blackout, when Time Warner Cable lost 300,000 subscribers in the blink of an eye, and continued friction between the content owners, the broadcasters, and the cable companies, it's looking quite unappealing to be in the business.

That is, unless you're John Malone.

Where many have seen a dying field in the face of disruptive Internet streaming businesses, Malone believes cable can thrive if it unites. Giant cable companies, bigger than any today, would have tremendous pricing power and a footprint large enough to hold sway over their counterparts. The companies could put the pedal to the floor on their On Demand offerings and effectively compete with the Netflix and Amazon.com streaming services.

Of course, one big question in Malone's vision of the cable industry is lack of competition. If the cable goes through a major consolidation, we will see even fewer companies in the field than exist today. This has had some analysts, along with consumer-friendly regulators, worried. But with new discussions including Comcast in the mix, the parties may have paved a way for the first round of transformation to begin.

The spoilsAccording to a Bloomberg report released Sunday, Time Warner Cable could be effectively split up between Charter and Comcast, fixing a slew of problems with the initial plan. For one, a joint approach would prevent an expensive bidding war, as both companies have expressed interest in Time Warner.

Splitting up Time Warner's subscribers would give each company a handful of new customers in key markets, while not giving any one the opportunity to monopolize the industry. This, at least in theory, would appease the FTC and FCC.

The deal would make even more sense for Charter, as it is a much smaller business than either Time Warner or Comcast. With Comcast injecting funds into the deal, Charter would have a much easier time obtaining the liquidity necessary to assimilate the larger Time Warner.

In the past few months, many have predicted a preliminary offer coming out as early as December. Regardless of how it is formulated, this deal will not happen quickly. Investors can expect at least a few months of regulatory reviews, without any guarantee that the initial offer would be acceptable. Still, in the long term, this may be one the better things cable investors have heard in a long time.

Author

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.